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phenny


Total Posts: 7
Joined: Oct 2014
 
Posted: 2017-01-26 16:17
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peter.russell


Total Posts: 10
Joined: Dec 2016
 
Posted: 2017-01-26 18:02
Sorry I am a little confused here: " He collects large credits as he rolls in while also monetizing vega and continuing to protect his portfolio with gamma rather than vega."

Where does the credits come from when he manages long OTM puts?

phenny


Total Posts: 7
Joined: Oct 2014
 
Posted: 2017-01-26 18:49
Apologies for any confusion... I am referring to a trade where I sell to close an existing long put position in the 6m-12m tenor while simultaneously buying to open a, for instance, 3 month put (or whatever expiry the rules outline). Theoretically, this trade would be a credit (buying shorter dated put to sell longer dated put, both OTM). Additionally, this trade will increase gamma and decrease the raw vega of the overall hedge position.

Hope this helps to clarify.

sigma


Total Posts: 105
Joined: Mar 2009
 
Posted: 2017-01-26 23:12
>> The overview of the strategy is to tactically manage long OTM SPX puts with the goal of owning longer-dated vega when volatility (both realized and implied) are low and monetizing this long vega exposure and swapping it out for long gamma exposure as implied and realized vol rises.

I wish it were so easy...

In practice two things will kill this kind of trade:

1) the skew: OTM put vols are much higher even if the realized vol and the VIX are low

2) the term structure: long dated vols are typically (much) higher than short dated vols

Right now, 1y 25-delta SPX put is trading at about 18% vol which is nearly double the VIX and costs about 3% of the spot. Now, 6m SPX put at the same strike trades at about 19% (6m put has a smaller delta so its skew is higher but its vol is mitigated by a smaller term premium) with the cost of 1.20%.

By a rough estimate the SPX must go down by 8% in 6 month time for you just to break-even on this trade (assuming fixed implied vols: note that your OTM option will move to ATM region so it will not have the skew premium and will also have a smaller term premium in 6m time)

In my experience, these types of roll strategies with deterministic rules for long vega/gamma do not work.

phenny


Total Posts: 7
Joined: Oct 2014
 
Posted: 2017-01-27 17:23
deleted

sigma


Total Posts: 105
Joined: Mar 2009
 
Posted: 2017-01-29 23:37
What are the intended rules for this strategy: buy long-dated puts and simultaneously sell short-dated puts?

phenny


Total Posts: 7
Joined: Oct 2014
 
Posted: 2017-02-01 23:00
>>What are the intended rules for this strategy: buy long-dated puts and simultaneously sell short-dated puts?

That is basically what is being vetted but I suppose it should work for any type of exposure that gets you long SPX delta.
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